Case Law Details
Narendrakumar Rameshbhai Patel Vs DCIT (ITAT Ahmedabad)
The appeal before the Income Tax Appellate Tribunal (ITAT), Ahmedabad arose from the order of the Commissioner of Income Tax (Appeals) for Assessment Year 2015-16. The assessee challenged, among other issues, the Assessing Officer’s (AO) expansion of a limited scrutiny assessment into a complete scrutiny without obtaining the approval required under CBDT instructions, the treatment of capital gains as business income, and the disallowance of deduction under Section 54F.
The assessee had sold a 30% share in a jointly owned parcel of land and declared capital gains after claiming deduction under Section 54 of the Income-tax Act. The return was selected for limited scrutiny on four specified issues: sale of property mismatch, mismatch in income/capital gain on sale of land or building, deduction claimed under the head capital gains, and increase in capital.
During assessment, the AO examined the nature of the land transaction and concluded that the assessee, along with co-owners, had undertaken activities amounting to property development. The AO noted that agricultural land had been converted into non-agricultural land, survey numbers were merged, plotting approval was obtained, and residential as well as commercial projects were initiated. On this basis, the AO treated the sale proceeds as business receipts instead of capital gains and disallowed the deduction claimed under Section 54.
The assessee contended before the CIT(A) that the AO had exceeded the scope of limited scrutiny without obtaining prior approval from the competent authority, contrary to CBDT Instructions No. 7/2014 and No. 20/2015. It was argued that the assessment should therefore be treated as void. However, the AO maintained that the enquiry remained confined to the sale of property, which was already within the limited scrutiny.
The CIT(A) rejected the assessee’s contention. According to the appellate authority, the AO had only conducted a deeper examination of the issues already identified under limited scrutiny, namely capital gains and the deduction claimed therefrom. The CIT(A) held that the AO had not ventured into unrelated issues and therefore no conversion from limited scrutiny to complete scrutiny was required. Consequently, the procedural objection was rejected.
Before the Tribunal, the assessee reiterated that the AO had effectively converted the limited scrutiny into a regular scrutiny by relying on information received from the revenue authorities without obtaining the mandatory approval. The Revenue argued that the AO had only examined the property transaction and therefore had remained within the permissible scope of the limited scrutiny.
The Tribunal examined CBDT Instructions No. 20/2015 and No. 05/2016 governing limited scrutiny assessments. It observed that in such cases, the AO is restricted to examining only the specific issues for which the case was selected. If the AO forms a reasonable view that income has escaped assessment on another issue, the case may be converted into complete scrutiny only after obtaining written approval from the competent authority, based on credible material and a direct nexus with the proposed enquiry.
The Tribunal found that the limited scrutiny notice did not include any issue relating to whether the assessee was engaged in the business of property development. It held that by treating the transaction as business activity and denying the deduction on that basis, the AO had travelled beyond the scope of the limited scrutiny notice without obtaining the required approval for conversion into complete scrutiny.
The Tribunal also distinguished the case of a co-owner, where a similar issue had been decided against the assessee on merits. It noted that the co-owner’s assessment had been a regular assessment under Section 143(3), whereas the present case involved limited scrutiny and a technical jurisdictional objection that was absent in the co-owner’s case. Therefore, the earlier decision did not govern the present appeal.
The Tribunal rejected the Revenue’s argument that the enquiry remained confined to the sale of property. It observed that changing the head of income from capital gains to business income went beyond the issues specified in the limited scrutiny notice. The Tribunal held that the proper course would have been for the AO to obtain approval for converting the assessment into complete scrutiny, which was not done.
Relying on an earlier Chandigarh Tribunal decision, the ITAT reiterated that in limited scrutiny cases, the AO’s jurisdiction is confined to the issues specified in the notice and cannot be enlarged without following the prescribed procedure. Since the AO had exceeded this jurisdiction, the Tribunal allowed the assessee’s technical ground. As the appeal succeeded on this jurisdictional issue, the Tribunal did not examine the merits relating to the characterization of income or the Section 54F deduction, treating those grounds as infructuous. The appeal was partly allowed.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
The captioned appeal has been filed at the instance of the assessee against the order of the Commissioner of Income Tax(Appeals), Gandhinagar (CIT(A) in short) dated 11/04/2019 relevant to Assessment Year (AY) 2015-16.
2. The Assessee has raised following grounds of appeal:
“1. The Ld. AO has erred in law in expanding the limited scrutiny to a complete scrutiny by going beyond the issues of verification which were mere technical issues of mismatch and expanding the scope to changing the head of income without taking necessary approvals of higher authority as required by the instructions given by CBDT. The Ld. CIT(A) Gandhinagar has also erred in confirming the action of the A.O., without properly appreciating the totality o f the facts of the case.
2. The Ld. AO has erred in law and on facts of the case in not considering all the facts of the case cumulatively as is required by the law and tests laid down by – “various judiciaries, to come to the conclusion of the transaction being an adventure in the nature of trade and consequently erred in assessing the total income at Rs. 3,57,65,52Q/- against the return income of Rs. 1,50,G4,250/-. The Ld. CIT(A) Gandhinagar has also erred in confirming the action of the A.O. without properly appreciating the totality of the facts of the case.
3. The Ld.AO has erred in law and facts of the case in considering Capital Gain income of Rs.1,48,86,543/- earned as income under head Business income by considering transaction of sale of land plot as adventure in nature of business and recalculate at Rs. 3,54,87,S13/-. Ld. CIT(A) Gandhinagar has also erred in confirming the action of the A.O. without properly appreciating the totality o f the facts of the case.
4. The Ld. AO has erred in law and on facts in not properly appreciating and considering various submissions, evidences and supporting placed on record during the course of the assessment proceedings and not properly appreciating various facts and law in its perspective. Ld. CIT(A) Gandhinagar has also erred in confirming the action of the A.O. without properly appreciating the totality of the facts of the case.
5. The Ld. AO has erred in facts and law in disallowing partial claim of deduction u/s 54F of the Act amounting to Rs. 30,26,486/- by considering it to be not a part of ‘house’. Ld. CIT(A) Gandhinagar has also erred in confirming the action of the A.O. without properly appreciating the totality of the facts of the case. ”
3. The first issue raised by the assessee is that the learned CIT-A erred in confirming the order of the AO by expanding the scope of limited scrutiny assessment without necessary approval.
4. Brief fact is that the assessee is an individual and claimed to have earned income under the head capital gain and other sources. The assessee during the year under consideration along with 4 other co-owners sold a piece of land admeasuring 4234 square meters in which he held his share for 30%. The assessee declared capital of Rs. 1,48,86,543/- after claiming deduction of Rs. 2,03,58,578/- under section 54 of the Act.
5. Subsequently, the return of the assessee was selected for limited scrutiny and the notice was issued under section 143(2) of the Act for examining the issues as detailed under:
(i) Sale of property mismatch
(ii) Mismatch in income/capital gain on sale of land or building
(iii) Deduction claimed under the head capital gain
(iv) Increase in capital
During the proceedings the AO observed from the submission of the assessee and information received from the Revenue authority that the impugned land was purchased by the assessee along with co-owner as agricultural land bearing 3 different survey numbers. Later on such land was converted as NA and different survey numbers merged as single survey no. Thereafter the assessee and co-owner made application for plotting of the land which was approved. The assessee with co-owners further initiated residential as well as commercial building project on the impugned land. Accordingly the AO held that the activity carried out by the assessee along with other co-owner amount to business activity. Thus the AO held the impugned sale as business receipt and disallowed the deduction claimed under section 54 of the Act.
6. Aggrieved, assessee preferred an appeal before learned CIT (A).
7. The assessee before learned CIT (A) submitted that the AO has travelled beyond the jurisdiction provided under the limited scrutiny. The notice under section 143(2) was issued only for the purpose of investigation of mismatch of income with form 26AS. But the AO converted the limited scrutiny into complete scrutiny and held the capital receipt as business receipt without obtaining any approval from the higher authority. The AO in this process violated the notification issued by the CBDT bearing no. 7/2014 dated 26th Sept, 2014 and notification no 20/2015 dated 29th Dec, 2015. Accordingly the assessee prayed to the leaned CIT (A) to hold the assessment as void and bad in law.
8. The ld. CIT-A called for the remand report from the AO who in turn submitted that the contention of the assessee is unacceptable as the notice was issued with respect sale of property and all the investigation was carried out during the proceedings only related to such sale of property. Therefore he/she did not travel beyond the jurisdiction.
8.1 The learned CIT (A) after considering the submission of the assessee and remand report confirmed the action of the assessee by holding as under:
“5.2 I have carefully considered the facts of the case, submissions made by the appellant, remand report and the order of the AO. So far as the ground no, 1 of the appeal is concerned, it does not relate to the assessment order which has been appealed against but raised for pointing out the procedural lapses and not arising out o f the issues determined by the Assessing Officer in the assessment order. The appellant has contended that the case was selected for limited purpose scrutiny and the A.O. did not obtain the prior approval of the Pr. CIT for converting the same into complete scrutiny as per the existing instructions of the CBDT. Vide letter dated 24.08.2017, the appellant has requested to examine the mismatched figures of sales, capital gain income for the sold property and capital gain income shown in the return of income. It has been noticed that the case was selected for limited purpose for sale of property and consequent capital gain and deduction form capital gain. Therefore, the A.O. has examined these issues revolving around the charging of capital gain, claim deduction there from u/s.54F of the Act and the A.O. did not even touch the issues beyond these issues such as income from house property, profit of the business etc. Thus, he has not travelled beyond the limited jurisdiction and not contravened the instructions of the Board issued from time to time and quoted by the appellant through paper book. The appellant’s contention that the AO has treated the land transaction as an adventure in the nature of trade instead of allowing the capital gain without obtaining the approva l of the competent authority and thus expanded the scope of scrutiny is also not legally tenable as the AO has every right to look into the nature of transaction within the limited space given for scrutiny. Just because the AO has treated the land transaction as adventure in the nature of trade, he has stepped out of the scope of limited scrutiny is not acceptable. I have perused the relevant instructions in this regard and found that the instructions are with regard to the issues identified through CASS. This case was also selected for limited scrutiny through CASS in F.Y. 2016-17 and accordingly notice u/s.143(2) was issued as is evident from the first para of the assessment order. Further, the appellant has also filed copies of notices issued u/s. 143(2) on pages 6 & 7 of the paper book wherein four issues have specifically been mentioned on which the limited scrutiny is proposed to be conducted. Item no.3 of the issue is – “Deduction claimed under the head capital gain”. Thus the AO has confined himself to the limited issue of claim made under the head capital gain. However, on further scrutiny, when he found that the capital gain claimed is not correct as the transaction is found to be an adventure in the nature of trade, he has denied this claim. Thus, this contention of the appellant is rejected as the AO has not gone beyond the mandate given, yes he made an intense enquiry by delving deep in the issue. The scrutiny carried out is not horizontal but vertical on which there is no censor. Question of seeking permission for conversion from ‘Limited Scrutiny’ to the ‘Complete Scrutiny’ would have arisen when the AO would have noticed any other issue apart from those four issues identified in CASS. As there is no such issue, there was no need to seek permission of PCIT. The appellant has relied on the decision of ITAT, Mumbai in the case of ITO vs. Pericles foods (P) Ltd. decided on 31,07.2007 and in relation to the AY 2001-02. At the relevant time, the scrutiny assessments were governed under two distinct provisions of section 143(2)0) and 143(2)(ii) of the Act and the scope of scrutiny assessment was confined to the issues as provided in section 143(2)([) of the Act, i.e. loss, exemption, deduction or relief claimed in the return was found inadmissible, the A.O. was empowered to issue the notice u/s.143(2)(i) of the Act so as to verify the limited issue. Therefore, the citation relied on in respect of A.Y.2001-02 wherein the scope of powers of the A.O. u/s 143(2)(i) were examined in the given set of facts in that case. Since in the present case of the appellant, the facts are quite different and cannot be compared with the facts o f the relied upon case. Similarly, the reliance placed on the case of Rajesh Jain v/s ITO [2007] 162 Taxman 212 (Chandigarh) is also not of any help to the appellant as the facts are clearly distinguishable. Considering the factual and legal aspects of the issue of limited scrutiny assessment, the ground no.1 is rejected. ”
9. Being aggrieved by the order of the Ld. CIT(A) the assessee is in appeal before us.
10. The Ld.AR before us filed 3 paper books namely paper book-I, II and III running from pages 1 to 74, pages 1 to 94 and pages 1 to 130 and drew our attention on page 1 to 2 of the paper book-I where the notice for “Limited Scrutiny” issued u/s 143(3) of the Act was placed. The Ld. AR further claimed that the Assessing Officer has converted the “Limited Scrutiny” to the normal/regular scrutiny u/s.143(3) of the Act, on the basis of document received from Revenue authority without taking necessary approval from the appropriate authority.
11. On the other hand the Ld. DR submitted that the AO has examined the property sold during the year and arrived at the conclusion that the assessee is carrying out the business of property development. Hence he has not traveled beyond the scope of limited scrutiny. The learned DR vehemently supported the order of the authorities below.
12. We have heard the rival contentions of both the parties and perused the relevant materials available on record before us. Admittedly, the case of the assessee was selected under “Limited Scrutiny” scheme as evident from the notice u/s 143(2) of the Act, placed on page 1 of the paper book-I. As per the CBDT instruction No.20/2015 dated 29/12/2015 and instruction no 05/2016 dated 14-07-2016 the Assessing Officer in case of “Limited Scrutiny” can only examine those issues for which the case has been selected or the issue mentioned therein. If the AO of the view that there is a potential escapement of income, he may convert the “Limited Scrutiny” into “Complete Scrutiny” but such view should be reasonable view based on credible information or material available on record. Furthermore, there should be direct nexus between such view and information/material. The relevant portion of the instruction stands as under:
“3. As far as the returns selected for scrutiny through CASS-2015 are concerned, two type of cases have been selected for scrutiny in the current Financial Year-one is ‘Limited Scrutiny’ and other is ‘Complete Scrutiny’. The assessees concerned have duly been intimated about their cases falling either in ‘Limited scrutiny’ or ‘Complete Scrutiny’ through notices issued under section 143(2) of the Income-tax Act, 1961 (‘Act)’. The procedure for handling ‘Limited Scrutiny’ cases shall be as under:
a. In ‘Limited Scrutiny’ cases, the reasons/issues shall be forthwith communicated to the assessee concerned.
b. The Questionnaire under section 142(1) of the Act in ‘Limited Scrutiny ‘ cases shall remain confined only to the specific reasons/issues for which case has been picked up for scrutiny. Further, the scope o f enquiry shall be restricted to the ‘Limited Scrutiny’ issues? “
c. These cases shall be completed expeditiously in a limited number o f hearings.
d. During the course of assessment proceedings in ‘limited Scrutiny’ cases, if it comes to the notice of the Assessing Officer that there is potential escapement of income exceeding Rs. five lakhs (for metro charges, the monetary limit shall be Rs. ten lakhs) requiring substantial verification on any other issue(s), then, the case may be taken up for ‘Complete Scrutiny’ with the approval of the Pr.CIT/CIT concerned. However, such an approval shall be accorded by the Pr.CIT/CIT in writing after being satisfied about merits of the issue(s) necessitating ‘Complete Scrutiny ‘ in that particular case. Such cases shall be monitored by the Range Head concerned.
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“2. In order to ensure that maximum objectivity is maintained in converting a case falling under ‘Limited Scrutiny’ into a ‘Complete Scrutiny’ case, the matter has been further examined and in partial modification to Para 3(d) of the earlier order dated 29.12.2015, Board hereby lays down that while proposing to take up ‘Complete Scrutiny’ in a case which was originally earmarked for ‘Limited Scrutiny’, the Assessing Officer (‘AO’) shall be required to form a reasonable view that there is possibility o f under assessment of income if the case is not examined under ‘Complete Scrutiny’. In this regard, the monetary limits and requirement of administrative approval from Pr. CIT/CIT/Pr. DIT/DIT, as prescribed in Para ?(d) of earlier Instruction dated 29.12.2015, shall continue to remain applicable.
3. Further, while forming the reasonable view, the Assessing Officer would ensure that:
a. there exists credible material or information available on record for forming such view;
b. this reasonable view should not be based on mere suspicion, conjecture or unreliable source; and
c. there must be a direct nexus between the available material and formation of such view. ”
13. However, on perusal of the notice for “Limited Scrutiny” we find that there was no mentioning/whisper about examination of the fact whether the assessee was engaged in the business of property development. Accordingly, we hold that the Assessing Officer has exceeded his jurisdiction by denying the deduction claimed under section 54 of the Act on the reasoning that the assessee is engaged in the business of property development as the same was not mandated under the ‘’Limited Scrutiny” notice issued under section 143(2) of the Act.
14. We are also conscious about the fact that this tribunal in the case of the co-owner namely Shri Harshadkumar Amrutlal Patel in ITA No. 361/AHD/2019 has decided the issue against the assessee on merit. Accordingly, the question arises once the issue involved in the case of the co-owner has been decided against the assessee, then can the Bench take of contrary view from the case of other co-owners. However, we find that the technical issue raised by the assessee in the case on hand was not there in the case of co-owner namely Shri Harshadkumar Amrutlal Patel. Thus we are adjudicating the present appeal from altogether a different perspective. Thus, the question of taking the contrary view does not arise.
15. In the case of the other co-owner namely Shri Harshadkumar Amrutlal Patel there was the regular assessment under section 143(3) of the Act, whereas in the present case, it is the case of the Limited Scrutiny. Accordingly, we hold that the facts of the case on hand are different with the facts of the case in the case of Shri Harshadkumar Amrutlal Patel. As the issue involved is different, then the bench is not bound to follow the decision of the coordinate bench taken in the case of the co-owner.
16. The Ld.DR before us has not brought anything on record justifying that the “Limited Scrutiny” was converted by the Assessing Officer under normal scrutiny after obtaining necessary approval from the appropriate authority.
17. We are also not convinced with the argument of the learned DR that the issue raised by the AO is limited to the activity of the sale of the property only. It is because if we admit the contention of the learned DR then the head of income from capital gain will also get change to the business income despite the fact that there was no question raised in the notice issued for the limited scrutiny under section 143(2) of the Act. The right course of action for the AO was to take the approval from the competent authority for expanding the scope of Limited Scrutiny to the regular assessment but he failed to do so. Thus, in our considered view inaction of the AO should not cause any harassment to the assessee.
18. In holding so we draw support and guidance from the order of the Hon’ble Chandigarh Tribunal in case of Rajesh Jain vs. ITO reported in 162 taxman 212 where it was held as under:
The jurisdiction of the Assessing Officer in such cases where the notices are issued for limited scrutiny is confined to the claims he has set out in the notice for verification. This position of law was further elaborated by the CBDT in its Circular No. 8/2002, dated 27-8-2002.
The CBDT Circular clarifies that the Assessing Officer does not have the powers to make the entire assessment of income in limited scrutiny cases. Now question had to be decided when the Assessing Officer does not have the powers while making limited scrutiny assessment to decide such issues which are not covered by the limited scrutiny notice, the Commissioner (Appeals) on appeal against limited scrutiny assessment can exercise the powers in excess of the power vested with the Assessing Officer. There is no doubt that the power of the Commissioner (Appeals) is co-terminus with the power of the Assessing Officer. So, however, in the instant case, when the Assessing Officer did not have the power to make a full-fledged assessment in limited scrutiny cases, the Commissioner (Appeals)’s power could not be enlarged beyond the power of the Assessing Officer in limited scrutiny cases. So, it was considered appropriate to remit the issue relating to allowance of depreciation in respect of the plinth to the file of the Assessing Officer for the purpose of fresh decision in accordance with law. Since the notice under section 143(2)(i ) was issued for limited scrutiny, the Assessing Officer was precluded from considering any other issue while making the assessment under section 143(3) under limited scrutiny. The decision of the Commissioner (Appeals) in considering the other claim of the assessee not covered in the notice issued under section 143(2)(i) for limited scrutiny was contrary to the provisions of the Act and, accordingly, was set aside.
In view of the above and after considering the facts in totality as discussed above, we are not convinced with the finding of the authorities below. As such the entire issue should have been limited to the extent of the dispute raised in the notice under section 143(2) of the Act for the limited scrutiny but the AO in the present case has exceeded his jurisdiction as discussed above. Thus the ground of appeal of the assessee is allowed.
19. As the assessee is succeeded on the technical issue raised by him, we refrain ourselves from adjudicating the other issues raised on merit. Accordingly, the issues raised by the assessee on merit become infructuous. Hence we dismiss the same as infructuous.
20. In the result, the appeal of the assessee is partly allowed.
This Order pronounced in Open Court 20/03/2020
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